Arab Spring, American fall

Australia’s version of the Occupy Wall Street movement may not have sustained the critical mass of similar movements around the world, but that is testimony to the vastly different economic environments of Australia and other mature economies.

Australia’s unemployment is half that in the United States. Sovereign debt is a sliver of most of that in Europe. The policy response, fiscal and regulatory, to the crisis was rapid and effective. We have not had a recession. And we are hitched to China and emerging Asia.

Yet the spectre of the rabid right in the form of Sydney shock jock
Alan Jones
cosying up to the hand-crocheted left in the form of Greens leader
Bob Brown
over coal seam gas mining shows an anxiety-ridden world can lead the unlikeliest individuals to seek solace in one another’s arms.

So it is with what’s now known as the Occupy Wall Street (OWS) movement. As US President
Barack Obama
observed in the past week, this seething mass of loosely articulated protest resembles the seething mass of angry if inarticulate protest called the Tea Party. And the Tea Party showed that a panopticon of internal contradictions could have an enormous impact. Tea Party candidates now sit in the US Congress and they nearly drove the world’s reserve economy off a cliff.

In one of the more colourful descriptions from the splenetic right, the OWS was described as a “mosh pit of left-wing incoherence for those wishing to vent and rant about anything that bothers them". Replace “left-wing" with “right-wing" and you have the Tea Party.

In similar tones the movement was dismissed as “inchoate", as if this was a pejorative. All these movements are literally inchoate, which means “in an early stage", “just developing". The Arab Spring less than a year ago was inchoate.

While the resentment of the OWS movement is often unfocused, it is not without genuine feeling, nor is it unfounded. The financial crisis was an existential as well as economic catastrophe. It revealed that not only did the so-called masters of the universe not really understand what they were doing, but that they didn’t care.

That the world is more complex than the placards of the “99 per cent" the OWS claim to be of the population is irrelevant to the vast majority, who can only see Wall Street bailouts, pandering to vested interests, one in 10 people out of work and entire conurbations of property foreclosure. But then the OWS movement is complex too.

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To take one specific thread of angst, executive pay: this is particularly relevant in Australia as annual meeting season gets under way and
GUD Holdings
became the first company to have its remuneration report voted down (a first strike in the two-strike regime that now gives shareholders a louder voice against excessive remuneration).

The angst that this scrutiny has generated among vested interests – that is, those receiving the packages and those awarding them (two groups that Lucian Bebchuk and Jesse Fried in their seminal Pay Without Performance: the Unfulfilled Promise of Executive Compensation demonstrate are inextricably co-dependent) – is testimony to the flimsiness of the empirical data supporting excessive executive remuneration.

Take the extraordinary arrogance and self-referential argument of
Amcor
chairman
Chris Roberts
at the company’s AGM on Thursday when a shareholder – one of the owners of Amcor for whom Roberts is an agent – questioned whether the hurdles set for executive bonuses were high enough.

In one breathtaking Marie Antoinette moment, Roberts dismissed all the issues the OWS movement raised yet recommended the shareholder do some serious study – that is, read an opinion piece by one of the rabid right that happened to agree with Roberts’ view of the world. Amazingly, he didn’t refer to the rigorously tested work of Bebchuk and Fried.

Roberts is not alone. The Amcor shareholder’s point was that the hurdles for more executive money are linked to relative performance but the shareholder’s returns are linked to real performance: profits and dividends.

Yet as equity markets have plunged over the last two years, companies previously considered bastions of good governance and shareholder value, such as
Wesfarmers
, have been resetting performance hurdles and restructuring remuneration packages to reflect how much more difficult it is to achieve targets. Exactly.

But where was the restructuring and hurdle-raising when all markets were running hot on borrowed liquidity before the financial crisis? Where were the chairman arguing that “we recognise we are operating in extraordinary circumstances and we are prepared to set higher hurdles because the market is on springs"? ANZ Banking Group’s
Mike Smith
at least recognises the legitimacy of the “inchoate" rebellion and has frozen the salaries of 900 senior executives.

The root of the anger over executive remuneration is that there has not been sufficient scrutiny of what executives actually have at risk, of the contribution they individually make against the returns they receive.

Consider that over the past decade CEOs have enjoyed a 133 per cent increase in median pay and a 190 per cent increase in bonuses, far outstripping average wages growth of 53 per cent and inflation of 28.6 per cent, according to the Australian Council of Superannuation Investors.

In that period share values rose just 31 per cent, prompting ACSI chief executive Ann Byrne to note that “the past 10 years have been far better for CEOs of top 100 companies than [for] investors".

Meanwhile, Australian Bureau of Statistics figures show the share of total factor output (from all income-producing sources such as property, labour, interest and entrepreneurship) that has gone to wages has been falling for a decade.

Wages represented just under 57 per cent of output in 2001 but have dropped 20 percentage points in 10 years to just under 37 per cent. Profit share has risen from 34 per cent to 38 per cent.

And the circumstantial evidence is that the executive ranks have corralled a growing proportion of higher output for themselves and not delivered it proportionately either to the rank-and-file workforce or to shareholders.

In a capitalist system, disproportionate wealth share in itself is not the issue. From a management perspective, more efficient managers – for which rising productivity is a proxy – should be rewarded more than less efficient ones.

If that is the case, shareholders and workers of those firms should also benefit disproportionately more. It’s a virtuous circle.

Productivity is not about costs per se – lower cost structures come about through higher productivity. Yet the default response to the productivity challenge of too much of corporate Australia is to lament regulation that limits their ability to sack staff and hold down wages.

Management control over labour is a necessary but far from sufficient condition for productivity growth; moreover, it is one which has such drastic multiplier effects on the broader economy – lower confidence, lower spending, higher credit defaults – that it is a lever requiring the utmost scrutiny.

But again, the scrutiny placed on labour force productivity has not been turned on management productivity. Indeed, some of the arguments dismissed as heretical if used by labour organisers, such as comparative wage justice, the belief that workers who have similar skills and jobs in different industries should receive the same award wages, are wheeled out in barely modified form to justify a generalised ratcheting up of executive remuneration.

Yet this line of argument is not extended beyond business ranks because if criteria such as qualifications, complexity, hours worked and contribution to society are used, C-suite salaries hundreds of times those of doctors, nurses, teachers and scientific researchers can scarcely be justified.

One of the most scathing pieces of analysis of the market failure in executive remuneration is Harvard-educated economist Diane Coyle’s The Economics of Enough, in which she uses orthodox economic analysis to shred arguments in support of the explosion in remuneration. “The whole merry-go-round of bonuses and performance-related pay is a sham," she writes.

And in the 2009 report Management matters in Australia: just how productive are we?- Findings from the Australian Management Practices and Productivity global benchmarking project, project leader Roy Green, dean of the faculty of business at the University of Technology, Sydney noted “a clear link between the quality of management – scored across 18 dimensions of people, performance and operations – and enterprise productivity. Since the late 1990s, Australia’s productivity performance has slipped from being one of the OECD leaders to a laggard".

More recent work by Ernst & Young in the firm’s “Australian productivity pulse" supported this work and found industrial relations legislation of whatever ilk was not the major issue. Employees at all levels cite management (at 54 per cent), organisation structure (23 per cent), lack of innovation (15 per cent) and outdated technology (8 per cent) as drains on productivity.

E&Y Advisory leader Neil Plumridge says the critical issue identified was “valueless work". “The productivity issue is one of leadership," he says. “People say productivity is a government issue, a labour law issue – it’s not." The E&Y survey of 2500 people covered all strata of the organisations, from shop floor to senior management. There was considerable agreement across many productivity issues, particularly wastage, but one broad discrepancy: whether a respondent felt valued by the organisation. Three-quarters of managers said yes compared with an organisation-wide average of just 60 per cent.

It is all too dramatic to compare the OWS movement with the Arab Spring, but one fundamental strand is common: the ruling elite appears increasingly out of touch with its workers and the community. Particularly when it continues to pay itself more as everyone else gets less.